I am guest-blogging on Brad Setser’s blog again and after one of my postings there has been an interesting discussion about selling shares as a form of sterilization. Since it is not clear that the PBoC can sell enough bills to sterilize its massive money creation, and anyway it is not clear that central bank bills are far enough from money to reduce liquidity in the system, one argument has been that the government should sell its shares in tradable companies and deposit the proceeds at its account at the PBoC. This would have the same effect as if the PBoC used equity rather than bills for its open market operations.
I think so far the consensus is that, in principle, for the state to sell its shares in traded companies and deposit the money at the PBoC makes perfect sense and would be a great way to sterilize money creation. In practice, however, selling enough shares to have a material impact might cause serious problems in the stock market, and in addition there could be political resistance and governance issues that would need to be resolved.
Although there has been some discussion of privatization as a way to slow the stock market bubble, as of yet I see no evidence that the government has seriously considered the possibility of using stock sales for sterilization – usually when policies are being considered we get rumors and feelers put out. In part that may be because outside the PBoC and a few other smaller offices there is still no sense that monetary policy may be out of control, and talk of sterilization makes the eyes of all but the hardened bunch who read my and Brad's blog glaze over.
It may also be that the political difficulties of doing so are so great that China's political leaders know it is a non-starter.It is true that if Hu, Wen and Wu get behind a direct order, it is hard to resist (although often is anyway), but the impression I get from my friends in government and academia is that the recent 17th Plenum was not a love-fest, and my CPC students and colleagues often tell me about the rumors they have been hearing about who is out to get whom.
Given the probable factional fighting I think no one in the leadership has any strong desire to alienate powerful provincial leaders or local bosses. Forcing through a decision, no matter how sound, might not be anyone's first priority. Look at the anti-corruption drive of the last four years, which was widely supported in principle and just as widely opposed in practice. Only the official press believes it has been anything but a failure, even though it clearly was a central concern of Hu's and Wen's.
In China, as anywhere else, politics can trump common sense.
In China, as anywhere else, politics can trump common sense.
-> And it actually shocked me when I realised how little humans didn't understand this .... Foriengers or domestic folks... I always from day 1 that the " QDPI express" would be very soon either cancelled or be suspended for good.... and I still have this opinion... Incl this state shares sell off... u simply should out even try to figure the economic senses out of it...
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (1) for "Can the PBoC use state share...
December, 2007
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